The United States District Court for the District of Rhode Island, applying Rhode Island law, has held that an insured v. insured exclusion in a directors and officers liability insurance policy does not apply to a court-appointed receiver because the receiver acts as an agent of the court under Rhode Island law, rather than on behalf of the company in receivership. Philadelphia Indem. Ins. Co. v. Providence Cmty. Action Program, Inc., 2017 WL 354279 (D.R.I. Jan. 24, 2017). The court also held that an endorsement in the policy, which expressly defined the receiver as an insured and as “contracted to perform services” for the company, did not alter the inapplicability of the insured vs. insured exclusion.

A Rhode Island non-profit corporation purchased a directors and officers liability insurance policy and shortly thereafter was forced into receivership by financial strain. A court-appointed receiver then brought a breach of fiduciary duty action against two former officers of the company and tendered a claim based on the suit to the company’s insurer. The insurer denied coverage on the ground that the claim fell within the policy’s insured v. insured exclusion, which excludes claims “brought or maintained by, at the behest, or on behalf of the Organization.” The policy also contained an endorsement, added to the policy when the company went into receivership, that defined the insured to include the receiver and labeled him as an “Independent Contractor,” defined in the endorsement as “an individual who is contracted to perform services for the Organization.” The insurer filed a declaratory judgment action, and the parties filed cross-motions for summary judgment.

The court framed the case around two issues: first, whether a court-appointed receiver acts “on behalf of” the company in receivership or the court under Rhode Island law; and second, whether the policy overrode that relationship because the endorsement defined the receiver as an “Independent Contractor” who “perform[s] services for the Organization.”

Relying on Rhode Island law, the court determined that a receiver acts on behalf of the court that appointed him, not the company placed into receivership, as evidenced by a court’s possession of a company in custodial egis when a company goes into receivership. The court also relied on the fact that, in this case, the company’s incorporation had been revoked by a Rhode Island official, making it impossible for the company to have a contingent interest in the proceeds of any lawsuit brought by the receiver.

The court also considered whether, irrespective of its holding that a receiver acts on behalf of the court, the policy’s amended definition of the receiver as an insured “contracted to perform services” for the company necessitated the finding that the receiver acts “on behalf of” the company. The court rejected this argument, first finding that an insurer lacks the authority to alter a receiver’s duty to the court. “To hold otherwise,” the court stated, “would allow private parties to contract away a receiver’s legal authority (and, by extension, the authority of the [court]) to collect the receivership entity’s assets.” Second, the court concluded that because the phrases “on behalf of” and “perform[ing] services for” contain different terms, the phrases denote different ideas. The court further determined that the absence from the endorsement of any reference to the insured v. insured exclusion weighed against its application to the exclusion.

Stay Connected

About

Wiley Rein’s Insurance Group is one of the largest and most prominent insurer-side practices in the United States. More than 50 lawyers represent numerous insurers on a wide variety of matters throughout the country. Recognized by Chambers USA as a highly regarded insurance giant, we represent insurers and industry organizations in claims, underwriting, and regulatory matters as well as in complex settlements and transactions. Read More.